This guy with his oh-so-clever idea of how to “fix” Illinois pensions with a really odd level pay plan gets in here three times this month because of all the Illinois-pension-brou-ha-ha-Chicago-etc. First, from May 14, a piece he wrote on his ‘clever’ idea:

Increase the funded ratio of the pension systems to a healthy point (80 percent, according to the Congressional Budget Office);

In fiscal year 1994, the aggregate unfunded liability across all five state systems was $17 billion. That sounds like peanuts given the size of the problem today, but it meant the systems were only 37 percent funded, a far cry from the 80 percent recognized as healthy.

And since he mentions 1994, I’m going to redo that unfunded liability graph, with a shortened time scale:

That’s starting in 6/30/1994, and I confirm the total was $17 billion that year. I want to note that the funded ratio drastically improved over the next few years, primarily due to two things: good returns on assets (y’all remember the late 90s, right?) and a trick where they switched from smoothed assets to market value, so as to capture that upswing sooner. I bet Martire was one of the people who had advocated making that switch, so that a pensions went from 37% funded to about 70% funded.

By the way, notice that even as the investments are doing well, and they’ve got their “one neat trick”, the unfunded liability continued to grow. The only year it did not grow was when they did another “one neat trick”: pension obligation bonds. Yeah, borrow money from bondholders, and hope it all works out. If not, you can always screw the bondholders, right?

It’s an idea long advocated for by Ralph Martire of the Center for Tax and Budget Accountability. Loosely, it can be explained by saying that Illinois would treat its unfunded pension liability like someone taking advantage of low-interest rates to refinance the mortgage on a house. Spread out the payment cycle (a law passed in 1995 ramps up payments, so it’s been expensive in recent years); to the certain consternation of actuaries, some have suggested lowering the target to 70 or 80-percent funding, making the funding goal more realistic. At a time to some politicians ““borrowing”“ is a bad word, and with ratings agencies on guard, the re-financing concept thus far hasn’t gotten much legislative attention.

Yeah, there’s a reason for that.

It’s also realistic that people won’t get paid their pensions as promised, if you don’t target fully funding them. The behavior in the late 90s shows that you can’t trust the politicians to take a good run as an opportunity to get to full funding — because they didn’t. The pensions were short-changed deliberately every year, in that they never put in the full “required” contributions.

I will show another time that even systems that do have funding discipline can run into trouble, but for now it is enough to know that always undercontributing to the pension fund makes the problem get worse every year, and if you’re Illinois, even good investment experience doesn’t make up for it.

Experts like to see a funded status of at least 80 percent, though some say even that’s not enough.

To be sure, some of this are a bit hazier than others, but pretty much the 80% benchmark is parroted as fact, without even attributing it to anybody. It’s just one of those “everybody knows” things, or at least the experts say.